Company Reports

We increase our fair value estimate for wide-moat Technology One by 2% to AUD 14.50 per share following its first-half result. The increase is due to the time value of money. At current prices, Technology One shares screen as significantly overvalued and implies a continuation of historically high revenue growth, which we consider unlikely. We attribute recent historically high growth rates to accelerated demand from governments and business in response to the covid-19 pandemic and high inflation feeding through in Technology One’s Consumer Price Index-linked contracts.

We expect Technology One’s strategic focus to revolve around increasing the number of products used by its local government and education customers in Australia and New Zealand. To a lesser extent, we expect Technology One to focus on vertical expansion and geographic expansion into the UK education market.

We expect Technology One’s strategic focus to revolve around increasing the number of products used by its local government and education customers in Australia and New Zealand. To a lesser extent, we expect Technology One to focus on vertical expansion and geographic expansion into the UK education market.

We believe the market overestimates wide-moat Technology One’s ability to maintain historically high revenue growth levels. To support our AUD 14 fair value estimate, we assume a 10-year revenue compound annual growth rate of 10%. This already imputes the business to be around 2.5 times its current size in 10 years. We believe Technology One is a high-quality business, with high-quality customers, low cyclicality, and a high-quality, sticky product suite, but we contend there’s a significant amount of optimism and success already baked into our fair value estimate. The shares screen as materially overvalued.

We maintain our AUD 14 per share fair value estimate for wide-moat Technology One following its full-year results. Earnings came in broadly in line with our expectations with slightly higher revenue offset by higher operating expenses as Technology One accelerated investment during the second half. At current prices, shares screen as overvalued.

We expect Technology One’s strategic focus to revolve around increasing the number of products used by its local government and education customers in Australia and New Zealand. To a lesser extent, we expect Technology One to focus on vertical expansion and geographic expansion into the United Kingdom education market.

We raise our fair value estimate for Technology One by 25% to AUD 14 per share following a transfer of coverage to a new analyst. Our upgrade is primarily driven by a better appreciation of the switching costs of Technology One’s product suite as well as the quality of its public sector customer base. Based on this, we have also upgraded our economic moat rating for Technology One to wide, from narrow previously. We forecast revenue to grow at a 10-year CAGR of 10% during our explicit forecast period and EBIT margins to expand to 37% in fiscal 2032 from 31% in fiscal 2022. We use a weighted average cost of capital of 7.5%, reflecting Technology One’s exceptionally low revenue cyclicality. We upgrade our Capital Allocation Rating to Exemplary and maintain our Medium Uncertainty Rating. At current prices, Technology One’s shares screen as slightly overvalued.

We expect Technology One’s strategic focus to revolve around increasing the number of products used by its local government and education customers in Australia and New Zealand. To a lesser extent, we expect Technology One to focus on vertical expansion and geographic expansion into the United Kingdom education market.

Technology One is a provider of Enterprise Resource Planning, or ERP, software in Australia and the United Kingdom. The company has an excellent track record of consistent revenue, NPAT, EPS, and franked dividend growth over the past 30 years, and the asset light nature of the company has supported strong cash generation and a consistently strong balance sheet. For example, the net cash balance has steadily grown over the past decade without material equity issuance.

Technology One is a provider of Enterprise Resource Planning, or ERP, software in Australia and the United Kingdom. The company has an excellent track record of consistent revenue, NPAT, EPS, and franked dividend growth over the past 30 years, and the asset light nature of the company has supported strong cash generation and a consistently strong balance sheet. For example, the net cash balance has steadily grown over the past decade without material equity issuance.

Technology One is a provider of Enterprise Resource Planning, or ERP, software in Australia and the United Kingdom. The company has an excellent track record of consistent revenue, NPAT, EPS, and franked dividend growth over the past 30 years, and the asset light nature of the company has supported strong cash generation and a consistently strong balance sheet. For example, the net cash balance has steadily grown over the past decade without material equity issuance.

Technology One is a provider of Enterprise Resource Planning, or ERP, software in Australia and the United Kingdom. The company has an excellent track record of consistent revenue, NPAT, EPS, and franked dividend growth over the past 30 years, and the asset light nature of the company has supported strong cash generation and a consistently strong balance sheet. For example, the net cash balance has steadily grown over the past decade without material equity issuance.

Technology One is a provider of Enterprise Resource Planning, or ERP, software in Australia and the United Kingdom. The company has an excellent track record of consistent revenue, NPAT, EPS, and franked dividend growth over the past 30 years, and the asset light nature of the company has supported strong cash generation and a consistently strong balance sheet. For example, the net cash balance has steadily grown over the past decade without material equity issuance.

Narrow-moat Technology One hasn’t made any material announcements since its interim financial result in May 2020, so it may be surprising to some investors that the stock has fallen by over 20% since the result. This may be even more surprising considering technology stocks have performed strongly over the period, with the Nasdaq Composite rising over 20%, and even the S&P/ASX 200 index is up 9%. However, over the past three years, the difference is far smaller, with Technology One up 57%, versus 68% for the Nasdaq Composite, and just 3% for the S&P/ASX 200 Index.

We have increased our fair value estimate for narrow moat-rated Technology One by 25% to AUD 8.50 per share following a slightly better than expected first-half result. The fair value estimate increase is due to a reduction in the cost of equity used in our financial model, to 7.5% from 9.0%. The cost of equity is the annual rate at which we discount future cash flows to their present value and represents a "fair" return for the investment risk, based on long-term historical stock market returns. For companies with a lower exposure to the economic cycle as the entire market, we use a cost of equity of 7.5%.

We’ve long considered narrow moat-rated Technology One to be one of the highest quality stocks listed in Australia but investors are well aware of its appealing attributes. Despite the COVID-19 induced share price collapse, experienced by most listed companies, Technology One has held up relatively well, with its share price flat over the past year versus the 18% fall in the ASX 200 index.

Narrow-moat rated Technology One is progressing nicely toward an entirely software-as-a-service, or SaaS, business model. The fiscal 2019 financial result was in line with our expectations, but we are increasingly encouraged by both the execution of the company’s strategy and its earnings outlook. We’ve adjusted our forecasts to reflect the adoption of the AASB 15 revenue recognition accounting standard and associated capitalisation of research and development costs, and slightly increased our earnings growth expectations.

Like the technology-heavy Nasdaq Composite Index, narrow-moat Technology One’s share price has gone sideways since its half-year result in late May 2019, which is somewhat understandable considering it’s made no material announcements in this time. In the 10 months leading up to the result, the share price was particularly strong, rising by over 100%. However, we didn’t think the rally was justified by an improving earnings outlook and we believed the stock had become significantly overvalued.

We weren’t particularly surprised that narrow-moat Technology One’s share price plunged by 13% following its first-half results. The share price has had an incredible run over the last few months, rising by about 130% since last July. However, despite moving beyond the challenges experienced in 2018, such as the Brisbane City Council contract dispute, disgruntled former employees, and the transition to a new chief executive officer, we don’t believe these minor events justified such a rally.

The Nasdaq Composite Index fell 23% in the fourth quarter of 2018 but has since rallied 23%, lifting local Australian listed technology stocks with it. Technology One’s share price has risen by 93% since mid-last year, however, we believe the rally has more to do with the improvement in market sentiment than an improvement in Technology One’s outlook. Little has been announced by the company in recent months and management’s vague earnings guidance, of strong profit growth skewed to the second half, is unchanged. We expect little to be announced before the interim fiscal 2019 result on May 29, 2019 as the company is already in its investor blackout period. We maintain our fair value estimate at AUD 6.20 per share and, at the current market price of AUD 7.94, believe the shares are now overvalued.